The Effect of Corporate Social Responsibility on t

The Effect of Corporate Social Responsibility on the Probability of Financial Distress for the Listed Companies in China Shenzhen Stock Exchange Yugan Li, Wushi Ye
Guangdong Peizheng College
Abstract: This article presents the relationship between “Corporate Social Responsibility” and the probability of financial distress using data from Shenzhen stock exchange from 2010 to 2017. Eventually, we found the better companies’ CSR performance, the lower probability of the financial distress. This relationship strengthens when company’s net profit is negative but weaken when its net profit is positive. The research indicated the exist profit and appropriate percentage of debt are critical to firms’ operation. If firms are in deficit, it cannot survive even making great effort on CSR investment. Therefore, this article suggests managers enhance CSR performance on the premise of maintaining a certain profits. Keywords: Corporate Social Responsibility; Altman Z-score; Financial Distress DOI: 10.47297/wspciWSP2516-252724.20210503
1. Research Question and Statement of Hypotheses
F irstly, we want to determine whether CSR has influence on the probability of
financial distress. Next, if there is relation among CSR and the possibility of financial distress, whether higher CSR will increase the possibility of distress. And what if we divided the data into two situations like positive net profit and negative net profit. Last, there is blank in this field in China, this paper is written for future contribution that Chinese companies can choose suitable CSR policy to control their financial distress level.
The research question about this paper is “Is corporate social responsibility has effect on the probability of financial distress?”
Hypotheses:
About the author: Yugan Li (1997-11), female, ethnic Han, native place: Jiangxi, China, Economic School of Guangdong Peizheng College, teaching assistant, master’s degree, re-search direction: corporate finance and futures market.
Wushi Ye (1997-07), female, ethnic Han, native place: Guangdong, China, master’s degree, research direction: corporate social responsibility.
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H1: CSR has impact on the probability of financial distress.
H2: The better CSR performance, the lower probability of financial distress.
H3: Positive net profit can strengthen the effect of CSR on the probability of financial distress.
2. Data and Model Collection
The data of financial distress and all control variables were collected from RESSET database and data of CSR was gained from HEXUN database. Integrate the data from two databases, we can get 8222 samples from 1283 normal firms (except ST and PT firms) from Shenzhen stock exchange from all industries. We added and calculated the score of all variables and used SPSS to analyze them finally. For CSR, we have used data of “Runling CSR rating” from HEXUN database, which is famous for developing and releasing ESG scores in China. To quantify the financial distress, at beginning, we found a famous model that published by a professor of finance, Edward I. Altman who use a linear combination of a set of financial ratios to predict company’s possibility of bankruptcy within two years (Altman, 1968). But after testing, we found there are many differences between Chinese and western countries, thus, we chose a new model called Altman Z China-score (Zhang, Altman, Yen, 2010) to continue our work.
There are three situations for Z China-score: a) safe zone, in other words, healthy firms, Z China-score is larger than 0.9; b) the “Grey” zone It has the potential of distress. When score is higher than 0.5 but smaller than 0.9; c) Distressed. The worst situation that score fall below 0.5, firms face high prospect of financial distress and it may turn to bankruptcy soon.
To confirm the influence of CSR on the probability of financial distress, we use the CSR as the independent variable and the probability of financial distress as dependent variable. Next, there are some control variables, that have effect on financial distress but disconnected to our topic, like firm size, leverage, cash, net profit, quick ratio and so on. We use multi-variable discriminant analysis to demonstrate our hypotheses and the multi-variable linear regression model is as followed:
Where Lev stands for the leverage ratio and t uses to distinguish the data from different year. Cash=Cash+ Cash Equivalents /Total Asset, quckrt means quick ratio. Curtolia is current liability to total liability. Ldbequ is long debt divide equity.
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DbastrtA for debt asset ratio. NPM is short for net profit margin which is equal to net income/sale revenue.
3. Results
In this research, we use Pearson correlation analysis to analyze the relationship between Altman Z-score and CSR for the listed companies in China Shenzhen Stock Exchange from 2010 to 2017. According to Table 1, the result shows that the estimated model can explain 57.2% of the observed values.
Table 1 Model Summary
The ANOVA table shows the overall significance of the regression model, where the F statistic is 1099.941, P < 0.001 and at the significant level of 0.01, the fitted multiple linear regression equation can be statistically significant.
Table 2 ANOV
A
From our reasearch, the correlations of Altman-China Score (DV) and CSR (IV) is weak positive since the |r|=0.264. Similarly, at 1% significant level, cash, quick ratio, and current liability to total liability ratio (CVs) have weak positive correlation with Altman-China Score while long debt to equity ratio (CV) has weak negative correlation instead. In addition, debt to equity ratio, net profit, debt to asset ratio, and firm size (CVs) have moderate negative correlation with Altman-China Score while NPM has moderate positive correlation instead.
We’ve verified it in four aspects: (1) There is a linear relationship between independent variables and dependent variables; (2) The residuals follow normal distribution; (3) The residual has homogeneity of variance; (4) There is no multi-col-linearity between independent variables.
According to Partial Regression Plot, CSR (CV) presents a certain linear relationship with the Altman-China Score (DV), which satisfies condition (1). From the histogram, the standardized residuals obey the normal distribution with mean value of 0 and standard deviation of 1. At the same time, it can be seen from
The Effect of Corporate Social Responsibility on the Probability of Financial Distress for the Listed Companies in China Shenzhen Stock Exchange
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the Normal P-P Plot of Regression Standardized Residual that the data is basically distributed around the diagonal line so it can be judged that the residual is basically subject to the normal distribution, which satisfies the condition (2). According to the scatter-plot drawn by the standardized residual and the standardized predicted value, the scatters’ fluctuation range of the standardized residual remains basically stable and does not change with the change of the standardized predicted value. It can be considered that the homogeneity of variance is basically satisfied, which meets the condition (3). The correlation coefficients between CVs are lower than 0.7, and the |P|s are all more than 0.05, indicating that the correlation between independent variables is weak, and it can be considered that there is no col-linearity, meeting the condition (4).
As the CV——Net profit is a binary variable, Pearson correlation coefficient is not suitable for this investigation. At the same time, the tolerances of each variable are larger than 0.2 and VIF is smaller than 10, indicating that there is no col-
linearity. Therefore, the final equation can be reasonably written as:
4. Discussions, Limitations, and Recommendations
Based on our result, we know Altman Z China -score (following as “Z China ” ) has a weak correlation with independent variable CSR. The reason is the awareness of CSR is relatively low among investors. Chinese investors pay more attention on short-term incomes but ignore to check whether these “high-return” firms are environmental-friendly or employee-caring. Managers are reluctant to emphasize CSR because it may worth noting in a short period, which harms managers’ KPI. However, from the result, we can still see as firms strengthen their CSR performance, their Z China raise and the higher Z China is, the lower possibility of financial distress.
Firms with higher CSR scores are more transparent that disclose all the essential statements and social welfare donation to public. In this way, investors feels more reliable and confident about the firm they invest so it helps firms to raise capital from capital market. In other words, firms which encourage CSR will keep high reserve cash. These money helps firms pass through financial deficit or even boarder their business safely.
When net profit is positive, beta between CSR and Z China is 0.148 and when net profit is negative, Z China is 0.078 which is lower. We think if firms stop making
129profits, even invest in CSR greatly may not save themselves. It give us two crucial implications. One is that the priority of an enterprise should always be making money. The other is that CSR can strengthen the power of healthy firms but never decide one insolvency firm’s fate.
The coefficient and correlations of NPM (Net Profit Margin) is higher than others control variables. This proves making profit should be the priority of company again. For the rest a few variables, like debt to equity ratio (leverage ratio), firm size, and debt to asset ratio, their correlations and coefficients with Z China is negative but quite strong. Almost all of them are relative to debt. Thus, too much debt hurt Z China , causing more serious financial distress. Besides, cash ratio, quick ratio, current liability to total liability ratio, and long-term debt to equity don’t play important roles. It implies that cash giving or dividend policy are probably not that significant in possible-bankruptcy judgement for a firm.
To further improve the research, we think we should compare the data before- and after- the COVID-19 to see whether CSR plays a more important role during economic downturn. Moreover, we are expected to test whether Z China -score is still suitable for current situation in China. In addition, later researchers are suggested to divide the data into different industry groups to see its effects respectively.
We recommend firms emphasizing more on CSR. Managers should control the policy about CSR internally from a long-term development perspective. When bank is deciding whether to lend money to this firm, our model can work as a guideline to optimize the choice. Likewise, banks can use our model to monitor companies with loans for whether they have good social responsibility. The relationship between CSR and financial distress can help lenders, managers and investors to select stocks which prevents them from suffering large amount of losses from companies’ scandals. For government departments which monitor the market conditions closely, we advise them to highlight the power of CSR and advocate both firms and investors to increase concerns about corporate social responsibility.
References
[1] Altman, I, E. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance , 23(4), 589-609.[2] Zhang, L., Chen, S., Yen, J., & Altman, E, I. (2010). Corporate Financial Distress Diagnosis in China. New York University Salomon Center , Working Paper.
The Effect of Corporate Social Responsibility on the Probability of Financial Distress for the Listed Companies in China Shenzhen Stock Exchange。